Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Important Bull Market Results for One-Day Reversal

The above numbers are based on hundreds of perfect trades as of 3/13/2013. See the glossary for definitions.

* Based on the trend low, not the ultimate low. See text.

** Based on the average drop compared to other small patterns with downward breakouts in a bull market

One-Day Reversal, Top, Identification Guidelines

Characteristic

Discussion

3 bars

The pattern is composed of one bar, but for identification, I use three bars, one day before to one day after the one-day reversal.

Top

Look for the pattern in a short-term up trend. In other words, wait for a downward breakout (a close below the bottom of the pattern).

Open and close

The open and close on the one-day reversal must be within 25% of the intraday low.

Surrounding days

The high price of the two adjacent bars must be below the mid point of the one-day reversal. This should make the one-day reversal bar stand alone, like
a tree atop a peak.

Tall

The one-day reversal should be at least as tall as the one-month average height of other price bars.

Volume

High volume should be present on the one-day reversal. However, I excluded this requirement since the pattern is rare enough without it.

One-Day Reversal, Top, Trading Tips

Trading Tactic

Explanation

Reversal

The pattern is supposed to act as a reversal of the up trend. Only trade those that reverse the short-term up trend (breakout downward).

Buy

Once price closes below the bottom of the pattern, sell short at the open the next day.

Measure rule

The one-day reversal fulfills the measure rule 67% of the time (bull market). That is, measure the height of the pattern and subtract it from
the low price to get the downward target.

One-Day Reversal, Top, Performance Statistics

For the following statistics, I used 1,160 stocks, starting from January 1990 to March 2013, but few stocks covered the entire range. All stocks had a minimum price of $5.
There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009.
Everything outside of those dates represents a bull market.

For each one-day reversal, I found when the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days
(21 days total) each, before the one-day reversal and the same peak/valley test after the one-day reversal. The closest valley or peak before the one-day reversal
is where the trend began. The closest peak or valley after the one-day reversal is where the trend ended. I compared the peak or valley to the average of the highest high and lowest low price of the
one-day reversal pattern.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the day after the pattern ended to the nearest trend peak or trend valley.

To determine the inbound price trend (I was looking for an up trend), I used linear regression on the average of the high-low prices in the five days before the pattern. That caught the short-term trend.

One-Day Reversal, Top, Performance and Failure Rates

Table 1: Performance and Failure Rates

Market

5% Failure

Average Drop

Bull

48%

6%

Bear

31%

10%

Table 1 lists the failure rates, sorted by market condition along with the average drop. Since the one-day reversal is supposed
to act as a reversal of the upward trend, I assumed a downward breakout.

A failure occurs when the stock fails to drop more than 5%.

The failure rates may appear high, but that's typical for short-term patterns like the one-day reversal. The highest failures occur in a bull market: 48% fail
to see price drop at least 5%. The average drop is just 6%. Since a bear market sucks prices lower, it makes sense that this pattern works better in a bear market.

One-Day Reversal, Top, Measure Rule

Table 2: Measure Rule Performance

Market

Success

Bull

67%

Bear

67%

Table 2 shows how often the measure rule works. Use the measure rule to estimate of how far price is likely to drop.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Subtract the height from the lowest low in the pattern to get the target.

Price reaches the measure rule target 67% of the time, regardless of the breakout direction.

One-Day Reversal, Top, Trading Performance

Table 3: Testing the one-day Reversal, top

Market

Bull

Bear

Net profit/loss

$(97.80)

$8.80

Wins

42%

51%

Winning trades

1,477

299

Average gain of winners

$748.19

$749.70

Losses

58%

49%

Losing trades

2,043

293

Average loss

($709.41)

($747.26)

Average hold time (calendar days)

28

15

Table 3 shows the performance based on 4,790 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No other adjustments were made for interest,
fees, slippage and so on.